Bundesbank President Jens Weidmann does not believe that the uncertainty generated by trade disputes – particularly between the United States and China – has thus far had any lasting impact on the global economy. Speaking at a joint press event with Federal Finance Minister Olaf Scholz on the sidelines of the Annual Meetings of the International Monetary Fund (IMF) in Bali, he said that, especially in European countries, the slight slowdown in growth is probably due to the normalisation of expansion rather than a consequence of the trade conflict.

At the same time, Mr Weidmann emphasised that the trade-restrictive measures undertaken thus far may very well adversely affect the real economy. He cited a Bundesbank study, according to which the punitive tariffs already introduced between the United States and China alone will probably see global trade shrink by 1%. In view of this, Mr Weidmann continued, we cannot expect to benefit from this trade dispute as lucky bystanders.

Downside risks predominate

As published in the latest edition of its World Economic Outlook, the IMF expects global real gross domestic product to grow by 3.7% this year and next year respectively. The slight downward revision of projections compared with the July figures is primarily attributable to price corrections for some emerging market economies, chiefly Argentina and Turkey. According to Mr Weidmann, however, their problems are, in essence, home-grown. That said, he continued, monetary policy normalisation in the United States has made the financing environment less hospitable overall for emerging market economies. The Bundesbank President added that, like the IMF, the Bundesbank believes that downside risks to the global economy predominate.

European deposit insurance scheme at risk

Turning to Italy, Mr Weidmann cautioned Italian banks against holding too many government bonds on their balance sheets, observing that stocks of government bonds on said balance sheets have increased rather than decreased of late.

If a European deposit insurance scheme were to be introduced, Mr Weidmann noted, there would be a danger of this instrument also assuming liability for sovereign default risk. He explained that this is why, before a common deposit insurance scheme can be created, not only the stocks of non-performing loans on banks’ balance sheets need to be addressed but also the sovereign default risks. Mr Weidmann proposed abolishing the preferential regulatory treatment afforded to government bonds – in other words, bringing an end to the status quo in which banks are not required to hold capital against such government loans.